11 October 2020

TAOST Wkly Update - Wk Ended 9 October 2020

Despite continued uncertainty around the globe, US markets managed to eke out their best week since July. Traders remained optimistic around the prospects of further stimulus, ignoring the twitter gangster’s early in the week that he was going to shut talks down. The tech sector led the gains on the back of continued M&A activity and some positive revenue guidance from the semiconductor sector. 

DJIA +3.3%

S&P 500 +3.8%

Nasdaq Composite +4.6%


CNN Fear & Greed Index

It was a relatively light week on the economic front. The strength in global commerce is lifting major economies such as China and Germany and easing fears that the pandemic could permanently rupture supply chains and send globalization into a retreat. And the U.S. budget deficit tripled (no surprise here) in fiscal year 2020, widening to $3.1 trillion and reaching 15.2% of GDP, the largest since 1945. 

As the duration of the pandemic lengthens, small businesses are growing more worried about “a severe cash crunch,” according to a new survey by Alignable. Forty-five percent of small businesses have earned 50% or less of their pre-pandemic revenue – eight months into the pandemic.  When asked what would help them most right not, 35% said reducing the case levels to increase confidence.  

That said, surprisingly, the number of business bankruptcies and insolvencies in most countries has declined this year as the world is seeing far fewer bankruptcies than it did in 2019. That’s largely due to assistance from central banks, the cost of money [or lack thereof], and government measures restricting things like foreclosure. That said, the likelihood of a sizable increase in “zombie” companies is likely in the aftermath (firms that have more debt than they generate in profits but are kept alive by relentless borrowing). The BIS discussed the potential long-term implications on the economy, in its report last month. In a nutshell, zombie firms are smaller, less productive, more leveraged and invest less in physical and intangible assets… which leads to a slower, less efficient and less productive global economy. And unfortunately, this trend is not new to 2020. According to the report, the number of zombies globally increased in 2019 for the third straight year and was on pace to reach one in five S&P companies in the U.S. this year before the pandemic. How long will these companies be able to survive on government life support?

Finally, next week kicks off the third quarter earnings season. For the most part, investors are anticipating uneven results and a drop in profit margins – setting expectations low enough for some potential positive surprises.  Consensus expects S&P 500 EPS to decline by 21% y/y (following a 32% y/y drop in Q2 and a 15% drop in Q1). Aggregate sales is expected to decline 3% and margins are expected to compress by 220bp to 8.7%. 

Macro News:

  • World Bank president David Malpass has called on investors to prepare to grant some form of debt relief for countries that may find themselves in a debt crisis, thanks to the pandemic. Malpass: "It is evident that some countries are unable to repay the debt they have taken on. We must, therefore, also reduce the debt level. This can be called debt relief or cancellation."

  • The coronavirus pandemic has thrown between 88 million and 114 million people into extreme poverty, according to the World Bank’s biennial estimates of global poverty. The reversal is by far the largest increase in extreme poverty going back to 1990 when the data began, and marks an end to a streak of more than two decades of declines in the number of the extremely impoverished, which the World Bank defines as living on less than $1.90 a day, or about $700 a year. The World Bank now estimates a total of between 703 million and 729 million people are in extreme poverty, and that the number could rise further in 2021.

  • A House panel is preparing a proposal to block Big Tech companies like Amazon and Apple from both owning marketplaces and selling their own products on them.

  • The coronavirus crisis has seen the world's billionaires increase their combined wealth by 25%, according to a new report from UBS and PwC. The report found there are now 2,189 billionaires, up from 2,158 in 2017, and their combined wealth amounts to $10.2 trillion. A couple hundred of them publicly donated $7.2 billion to help fight the pandemic.

  • Federal Reserve Chairman Jerome Powell warned of potentially tragic economic consequences if Congress and the White House don’t provide additional support to households and businesses disrupted by the coronavirus pandemic.

  • Office rents are falling more than twice as fast in San Francisco as in any other major U.S. city, down 4% between March and September this year.

  • 45 halts aid talks until after the election. 45’s administration abruptly called off bipartisan coronavirus negotiations, jolting U.S. markets and surprising lawmakers of both parties. 

  • Prop 22 is shaping up to be California's most expensive ballot question ever, and its outcome could upend a gig economy business model. If it passes: Gig economy companies would be able to continue classifying delivery workers and ride-hail drivers as contractors, while providing some new benefits like minimum earnings, health care subsidies, and vehicle insurance. If it fails: Gig economy companies could be required to abide by a California law that effectively would cause them to treat such workers as employees.

  • 45’s administration may place restrictions on payment platforms operated by Jack Ma’s Ant Group and Tencent Holdings over concerns that the Chinese companies are a threat to U.S. national security, Bloomberg reported. The U.S. is concerned that Chinese fintech firms could gain access to banking and personal data belonging to millions of people. The news comes as Ant Group is preparing to launch an IPO as early as this month.

  • In 1989 businesses with fewer than 100 employees accounted for 40% of the workers employed by all U.S. firms, according to the Census Bureau. Newly released data show that as of 2018 that had fallen to 33%. Now it is almost certainly even lower. Small-business transaction data collected by software and business-services provider Womply show that about 1 in 5 businesses that were open in January have stopped transacting entirely. Most of them have likely closed for good.

  • Security experts expect cyberattacks to increase in frequency and severity in the coming years, as more consumer goods are sold with internet connectivity embedded by default.

  • The Department of Justice said in a new report that law enforcement is hampered by the global nature of digital coins and the lack of consistent regulation across regions. Cryptocurrencies in general are called detrimental to the safety and stability of the international financial system due to the opportunities for rogue nations, criminals and terrorists to skirt reporting requirements.

  • U.S. credit-card balances fell for the sixth straight month in August, a sign of caution as households navigate through a sharp recession and slowing recovery. Outstanding revolving credit dropped to $985.3 billion, the lowest level in more than three years, according to consumer credit data from the Federal Reserve.

  • States accidentally overpaid thousands of workers over the spring and summer during a rush to get relief to unemployed and idled Americans. Now they want the money back. Even though the funds have long since been spent and many of those workers continue to struggle with the coronavirus pandemic’s economic fallout, people across multiple states are being asked to repay thousands of dollars in unemployment benefits or are having their current benefits cut to make up the difference.

Micro News:

  • Entertainment crisis: The parent company of Regal Cinemas will temporarily close all 663 of its movie theaters in the U.K. and U.S.

  • Google is expected to face a lawsuit as soon as this week for alleged antitrust abuses from the Justice Department and a number of state attorneys general.

  • John McAfee has been indicted for tax evasion in the U.S. The highly colorful antivirus magnate was arrested in Spain and faces extradition. Prosecutors say he didn't file any taxes for the four years from 2014 to 2018, even though he earned millions from consulting work, speaking engagements, selling the rights to his life story, and promoting cryptocurrencies.

  • Sports betting stocks have been some of the best performers on the market this year, with DraftKings shares up 466% and Barstool Sports-backed Penn National up 176%. Despite the strong growth, a CivicScience survey shows a large number of people in those states are still unaware of the apps.

  • Brazilian ride-hailing app 99, a wholly owned unit of China’s Didi Chuxing, has partnered with Facebook to enable users to order rides through the WhatsApp messaging app, Reuters reported.

  • After a 16-month investigation into the tech giants, Democratic lawmakers have released a sprawling report on Amazon, Apple, Facebook, and Google, accusing the companies of anti-competitive behavior. “To put it simply, companies that once were scrappy, underdog startups that challenged the status quo have become the kinds of monopolies we last saw in the era of oil barons and railroad tycoons,” the report reads.

  • Airbnb burned through more than $1.2 billion in cash between mid-2019 and mid-2020, according to previously undisclosed figures, as the plunge in global travel earlier this year eroded a balance sheet already weakened by big increases in spending on hiring and marketing. The cash drain wiped away more than a third of what the company had on hand as of March 2019, financial documents seen by The Information show. The biggest portion of the cash burn came in the first quarter of this year, when the company had to dole out travel refunds as Covid-19 broke out, underscoring how the pandemic depleted Airbnb’s reserves.

  • Nasdaq is in talks with Gov. Greg Abbott about potentially relocating its electronic trading systems from New Jersey to Texas.

  • Ripple, the San Francisco-based cryptocurrency giant, is threatening to leave the U.S. due to its regulatory climate. Ripple is engaged in a long-running argument with the SEC and investors over the nature of its XRP digital currency—it claims XRP is decentralized and therefore should be exempt from securities laws. Likely destinations if Ripple does flee the States? The U.K. or Singapore.

  • JPMorgan Chase announced a $30 billion investment over the next five years that the company says will address some of the largest drivers of the massive wealth gap between Black and white Americans. JPMorgan has earmarked $14 billion for new housing loans plus: a) $8 billion to increase affordable housing and homeownership in underserved communities, b) $4 billion for mortgage refinancing, c) $2 billion for small business lending, and d) $2 billion in philanthropic capital.

  • NextEra Energy, the world’s largest solar and wind power generator, has surpassed ExxonMobil in market value, jumping from a $32 billion valuation in October 2010 to more than $145 billion on Wednesday.

  • Coinbase says 60 of its employees (about 5%) decided to take an exit package after the company declared itself a largely politics-free zone, and its CEO says the final number will likely be higher.

  • In response to the pandemic, MassMutual has offered free, three-year life insurance policies to frontline health care workers. The company has created an easy online application that doesn’t require a physical. The only requirement is that the person live in the U.S., be no older than 60, make less than $250,000, and be employed or volunteer at least 10 hours per month at a health care or emergency medical service provider.

As I mentioned above, earnings kick off this week, so be ready.

Have a good one.

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